Subprime Subterfuge

Today the Mortgage Bankers Association released its quarterly “National Delinquency Survey.” Delinquencies and foreclosures rose across the board, across each sector of the mortgage marketplace, prime and subprime alike. But subprime adjustable rate mortgages (ARMs) really led the way, with delinquencies in this sector up from 13.22% in the third quarter of ’06 to 14.44% in the fourth.

“The significant increases in delinquency rates has in some cases led to unexpected increases in credit losses and the failures of some subprime specialist firms,” writes Doug Duncan, MBA’s Chief Economist in the press release.

OK, “unexpected increases in credit losses” really kills me, because what exactly did the industry expect? I’ve gotten several e-mails, one nasty one in particular, to the RealtyCheck mailbox, saying that we reporters should be tarred and feathered (I’m using a nicer term) for not warning of the subprime meltdown. Now I’ll admit, I only pitched this beat 2 years ago, as a response to the housing market boom (I’ll also admit that the managing editor at the time didn’t think CNBC needed a real estate beat…she no longer works here), and so I didn’t exactly know how a housing downturn could affect the subprime mortgage market. I know now that the downturn in the housing market after the last recession (circa 2001) caused a steep rise in mortgage delinquencies and foreclosures.

What I fail to understand is how all these well-seasoned investors, who clearly saw a run-up not just in the number of subprime mortgages being issued, but in the number of subprime lenders, didn’t think there would be some kind of piper to pay. We’ve been talking about the “resetting” of all these adjustable rate mortgage products for a good two years now, on the air and off, and I just don’t see where the banks and the lenders would fail to calculate that it would be those with poor credit who would default first.

I interviewed Doug Duncan of the Mortgage Bankers Association myself today, and he tried to downplay the subprime troubles.

“Historically the peak foreclosure rate in subprime adjustable mortgages happened after the 2001 recession and it rose to about 10%; today foreclosures on subprime adjustable are at about 5.6%, so we're still well below that historical peak,” he said confidently.

But the number of subprime adjustable rate mortgages out there now is twice the number it was in 2001. Let’s rethink that math, shall we??

“It's probably close to the same because the market's probably about double even though the foreclosure rate's about half, so it's probably about the same.” Thaaaat’s right Mr. Duncan.

The number of foreclosures for subprimes is about what it was after the recession, that big macro-economic factor that everyone stresses is MISSING this time around. So I have to ask again: if the writing was on the wall back then, barely 5 years ago, then how did the investors miss it this time around?? Did they just expect that home prices would continue to appreciate at a double-digit rate, when affordability was at an all-time low and everyone and their mother was crying “unsustainable!!!!”?

There’s no subterfuge here. We reporters haven’t been hiding it from you. Low credit is low credit. There’s a reason they call them subprime.